German wage rises lift hopes of eurozone recovery

Andre Krolow is looking forward to indulging his passion for rare vinyl records and a longer-than-usual summer holiday. The foreman at a midsized manufacturer in Lower Saxony is one of 3.7m German metalworkers who will receive a 3.4 per cent pay rise from April.

After years of belt-tightening, in which Germany held increases in unit labour costs below the European average, the inflation-busting settlement struck by IG Metall, Germany's largest union, is being seen as a trendsetter for pay negotiations in other sectors.

That shift is being welcomed not only by workers like Mr Krolow but also Germany's trading partners, who believe it could bolster the eurozone's economic recovery. They have long complained that years of wage restraint have fuelled Germany's large current account surplus, holding down demand for their products while allowing German exports to flourish.

At the same time, some fear rising wages could inhibit competitiveness.

"When things are going well, you have to give something back, but you have to be careful that you don't endanger the model of success," said Georg Weber, the managing director of Mr Korolow's employer, MKN, a maker of kitchen equipment for caterers. "We have to be careful that Germany doesn't lose its competitiveness."

Already other German employers have followed suit in raising pay. Germany's chemical association BAVC agreed a 2.8 per cent pay rise with trade union IG BCE, even though the industry's output is forecast to contract by 0.5 per cent this year.

This, combined with a new €8.50-an-hour mandatory minimum wage and rules that make it easier to extend labour agreements to non-unionised workers, will contribute to a rise in labour costs from 2.5 per cent to nearly 4 per cent this year, said Jorg Kramer, chief economist at Commerzbank.

There are signs that such rises are encouraging frugal German consumers to reach into their pockets. Consumer spending surged in the last quarter of 2014, according to the country's federal statistics office - outstripping even UK levels - as employment reached a record post-reunification high of 43m.

"This pattern is going to continue in 2015," said Andreas Rees, chief German economist at UniCredit Research. "It is not encoded in the DNA of Germans to save more money and spend less than people in other countries as many observers seemingly think."

Germany's comparatively modest wages have their origins in the aftermath of reunification, when high unemployment and business outsourcing reduced the bargaining power of German labour. In exchange for job guarantees unions were prepared to accept more restrained pay rounds. Between 2004 and 2010, the growth in German labour costs was below the EU average even as its economy grew strongly. But since then, the trend has reversed, according to Germany's federal statistical agency. In 2013, German manufacturing labour costs were the fifth highest in the EU, at an average of €36.20 an hour.

At MKN the prospect of further pay increases is prompting concern among the management. Founded in 1946, MKN is a classic German Mittelstand business; a family-owned machine maker that derives 55 per cent of its €90m annual turnover from exports but manufactures entirely in Germany.

Over the past three years, there have been "relatively high" wage increases for German manufacturing, Mr Weber said. In response MKN plans to slow the pace of investment, halve the number of new hires this year and review product lines to see if any outmoded items needed to be dropped.

Mr Weber said the 3.4 per cent deal agreed with IG Metall represented a "high six-figure sum" for his business. He said: "I won't say it's an enormous problem, but it puts pressure on you to achieve growth, and you have to be very efficient."

Others are more sanguine. Mr Rees said that higher wages would have a "positive but moderate" impact on rebalancing between Germany and the eurozone.

Wage increases, he said, would be "beneficial but not a panacea".

On the factory floor, where men in welding masks are turning sheets of metal into sections of industrial cookers, Mr Krolow said that the company's technical proficiency trumped any loss of competitiveness through rising wages.

"There's so much know-how in this company - it goes back generations," he said. "This knowledge of working with metal has grown so high here, that the label 'Made in Germany' really means something."

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